By Luisa Maria Jacinta C. Jocson, A reporter
A DECREASE in US spending could hurt remittances and exports to the Philippines, although this still outweighs domestic risks, Fitch Ratings said.
“Fitch expects that some of the biggest channels of impact will be due to weak US demand for imports and outbound tourism, lower income and e.fit affects financial channels and commodity prices,” said the report.
The rating firm expects US consumption growth to slow slightly over the next 12 months and decline to 1.4% in 2025 from 2.2% this year.
“A sharper decline could have a significant impact on emerging market incumbents, although we view this risk as low,” it added.
US consumer confidence fell to a three-year low in September amid growing fears about the job market, even as more households plan to buy a home in the next six months, Reuters reported.
Consumers Conference BoardfThe identity index fell to 98.7 last month from a revised high of 105.6 in August. The decline was the biggest since August 2021. Economists polled by Reuters had predicted the index would rise to 104 from a previously reported 103.3.
The Philippines is among the countries that may have spillover effects from anticistrong weakness, says Fitch Ratings.
“The report mentions the Philippines as one of the countries with the smallest, but most important, investment in US consumer spending,” said Krisjanis Krustins, director of Fitch Ratings’ Asia-Pacific Sovereigns group and chief analyst for the Philippines, in a statement. email.
The report showed the impact of muted consumption on various channels in emerging markets (EM) like the Philippines, such as exports. “The US is the most important export market for many EMs, so weak US domestic demand could have a significant impact on export earnings,” he said.
It noted that the Philippines is among the countries where goods are exported to the US account for 3-5% of the economic product. This indicates “slightly lower exposure, but still significant potential.”
The latest data from local statistics authorities showed that the United States remained the leading destination for Philippine-made goods in July, with exports worth 1.06 billion dollars, equivalent to 16.9% of the month’s total.
“In some cases, such as China, this metric may understate exposure as exports may be part of an industrial supply chain that ultimately depends on US consumer demand,” Fitch Ratings added.
Meanwhile, revenue may be dampened by an expected decline in US consumer demand.
“The decline in US consumption generally affects the US economy more broadly, with negative effects on the country’s labor market and income growth.”
Fitch Ratings said this could affect the value of remittances to emerging markets “as a large proportion of migrant workers are employed in service sectors that are likely to be affected if consumption is reduced slightly.”
“The US’ large immigrant and diaspora communities mean it is also a leading source of remittances for many other EMs,” he said. “This includes both countries where remittances are large as a share of GDP (gross domestic product) – such as Armenia, Cabo Verde, Georgia, Ghana, Nigeria, the Philippines and Tunisia,” it added.
Data from the Philippine central bank showed that remittances from overseas Filipino workers (OFWs) increased by 2.9% to $19.332 billion from January to July. The US accounted for 41.1% of remittances.
By 2023, remittances reached a record 37.2 billion dollars and accounted for 8.5% of the Philippine economy.
“However, we believe there may need to be a significant impact on the US labor market to have a significant impact on capital flows from the US,” Fitch Ratings said.
“Remittances tend to be more stable and stable than inflows, as they are influenced by many factors beyond the level of economic activity in the source country, including self-interest driven by conditions in the receiving country,” it said. “Remittances have held up well during the economic disruption associated with the COVID-19 (coronavirus disease 2019) pandemic.”
Meanwhile, Mr. Krustins said domestic factors continue to pose a greater risk to the Philippines than external typhoons.
“However, domestic demand is the main reason for the Philippines’ growth of 5-6% at the moment, so in terms of magnitude, many local risks represent the biggest possible downside,” he said. “This may involve a renewed increase in inflation, with a significant impact on consumer spending. The weather is also a constant threat.”
Inflation fell to a seven-month low of 3.3% in August from 4.4% in July. The central bank expects inflation to fall to 3.4% this year.
“Structurally, one of the key challenges for the Philippine economy is to address the weaknesses in the infrastructure, workforce and regulatory framework, to enable more private and foreign investment; without this, growth may stabilize at low levels,” he added.
The government aims to spend 5-6% of economic profits on infrastructure annually.
WEAKNESS OF THE OLD
Meanwhile, emerging market currencies could benefit from a weaker US dollar, Fitch Ratings said.
“A sharper-than-expected decline in US consumption may affect the outlook for US interest rates, which may be lower than the baseline, and the US dollar, which may weaken,” he said.
“A weaker US dollar could support export competitiveness in dollar-denominated EMs. It will also reduce the burden of servicing the US dollar debt in local currency terms,” it added.
Mr. Krustins said the start of the US Federal Reserve rate cut cycle will also support the peso.
“The start of the Fed tapering cycle should generally support the value of the Philippine peso, similar to other EM currencies and indeed, the peso has strengthened from a weak point in June,” he said.
The Federal Reserve last month cut interest rates by 50 basis points to 4.75%-5%, the first reduction since 2020 that Fed Chairman Jerome H. Powell said was intended to show policymakers’ commitment to maintaining a low unemployment rate.
“However, we expect the Bangko Sentral ng Pilipinas to maintain a low interest rate differential relative to the Fed, compared to historical norms,” said Mr. Krustins. “This, combined with a shift to a current account deficit, could limit the upside of the Philippine currency.”
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